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“Europe should take responsibility for regulating banks”

Dr Patrick Honohan delivers annual Mais Lecture

The Governor of the Central Bank of Ireland, Dr Patrick Honohan, delivered this year's Mais Lecture at Cass Business School last night, where he laid out the case for a banking union across the whole EU.

Dr Honohan, who also sits on the European Central Bank's governing council, said Europe should take responsibility for regulating Ireland's banks and repaying bondholders of collapsed financial institutions.

He argued that a new, pan-European regulator wouldn't be affected by national blind-spots such as the Irish property bubble, and could therefore do a more effective job of supervising banks.

Dr Honohan also suggested that paying off busted bank bondholders should be "the responsibility of a Europe-level resolution agency" and not of "stressed countries" and condemned the "irresistible" pressure for Ireland to preserve the European bond markets by paying off bank bondholders.

The governor added that steps towards creating a new "European banking union" could initiate the "growth recovery which is so essential."

An EU banking union would see centralised regulation, licensing and supervision, along with central responsibility for resolution and public sector solvency support.

He said EU nations, and not just those that use the euro, should work towards establishing EU-wide rules and institutions for safely closing down failed banks and protecting depositors in the event of a lender's collapse. Such a strategy would complement a global push to require banks to hold more capital to enable them to absorb losses without falling back on taxpayer support.

But he also insisted EU-wide rules shouldn't prevent national bank regulators from imposing tougher rules on domestic banks if they felt it appropriate to tame local credit booms. "Regulators must not hide behind the single market as an excuse for dodging unpopular bubble-bursting measures of restraint."

 "A pan-European resolution agency would go hand in hand with Europe wide regulation, so Europe could collectively take responsibility for banking failures," he said, noting that Ireland was under "irresistible pressure" to ensure senior bank bondholders were repaid.

"I could not see the case for asking a stressed government to do this order to protect the functioning of the bank bond market in other countries," he said. "Such decisions, and paying for them, should at least be the responsibility of a Europe-level resolution agency."

He added that getting an "alternative" to creating a European banking union "could be a progressive dismantling of the European single banking market", something that he was "not at all sure" would bring a benefit to either Ireland or the UK.

Download a copy of the Governor's lecture.

Watch the Mais Lecture

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